How public information affects asymmetrically informed lenders: Evidence from a credit registry reform

Abstract

We exploit exogenous variation in firm's public information available to banks to empirically evaluate the importance of adverse selection in the credit market using a Pakistani banking reform that reduced public information. Originally, the central bank published credit information about the firm and (aggregate) credit information about the firm's group. After the reform, the central bank stopped providing the aggregate group-level information. We construct a measure for the amount of information each lender has about a firm's group using the set of firm-bank lending pairs prior to the reform. We show those banks with private information about a firm lent relatively more to that firm than other, less-informed banks following the reform. Remarkably, this reduction in lending by less informed banks is true even for banks that had a preexisting relationship with the firm, suggesting that the strength of prior relationships does not eliminate the problem of imperfect information.